ECONOMY-ARGENTINA: Devaluate No, ‘Dollarise’ Maybe

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Oct 5 2001 (IPS) - The Argentine government admitted Thursday that it may “dollarise” the economy if the current crisis persists, after worsening in the last few days and feeding fears of a devaluation of the Argentine peso, the exchange rate of which has not been altered in 10 years.

“The government is not going to devaluate (the peso). In an extreme case there would be a lesser cost in dollarisation,” said the chief of the Cabinet, Christyan Colombo, just minutes after President Fernando de la Rúa denied for the second time in 24 hours that there would be a change in the one-to-one parity of the Argentine currency to the US dollar.

The dollarisation of the economy, a measure that Carlos Menem had suggested towards the end of his presidency (1989-1999), is now being demanded by many within the financial sector who argue that it is the only way to quash fears of devaluation.

Experts reckon that the dollarisation route, a path followed in Latin America by Panama, Ecuador, El Salvador and Guatemala, tends to be an emergency exit to avoid the permanent and pronounced depreciation of the local currency, but does not always achieve positive results in the long term.

Eduardo Curia, who served as assistant minister of Economy in the early years of the Menem government, told IPS that dollarisation would only eliminate the threat of currency devaluation, but would not resolve any of Argentine economy’s basic problems, which centre around high indebtedness and the inability of the nation’s products to compete.

Argentina pegged the peso to the dollar in 1991 in what turned out to be a successful bid to end the hyperinflation that erupted during the final months of the Raúl Alfonsín government (1983- 1989).

Under this system, each Argentine peso is backed by one dollar in the national treasury reserves. The approach was ratified by the so-called “convertability law” and served to reinstate confidence in the local currency.

Beyond the fact that dollarisation would not benefit Argentina’s economy, maintains Curia, the right conditions do not exist to carry such a project forward, given the fact that there are not enough dollars available to exchange all pesos currently in circulation.

The expert pointed out, however, that the government could implement a currency devaluation as a step previous to converting the national economy to dollars.

Argentina’s debt – combining public and private – already surpasses 142 billion dollars and the country has entered its fourth year of recession.

This scenario stands in the way of financing the economy with new credits, which led the De la Rúa government to propose eliminating the fiscal deficit by limiting the government to spending only what it takes in.

De la Rúa stated Thursday that “there is no reason for risk or uneasiness” and that the so-called “zero deficit” policy will remain in place.

For the second time in two days, the president reinforced his backing for Economy Minister Domingo Cavallo, an attempt to counter rumours of his impending resignation. “Here he stands beside me, as you all can see,” De la Rúa responded to journalists who inquired about the minister’s status.

There are various rumours circulating, all refuted by De la Rúa, that indicate Cavallo could be replaced either before or after the legislative elections slated for Oct 14.

Cavallo was the architect of the peso-dollar parity system in 1991, when he served as Menem’s economy minister.

Earlier this week, he responded to questions about his potential resignation with the statement, “persevere and you shall triumph,” which reportedly is his motto.

Cavallo’s response came during the same meeting in which he acknowledged that tax revenues had fallen 14 percent in September compared to the same month last year.

The decline in revenues for the government coffers is a serious problem for the De la Rúa administration, which has promised not to seek new loans and to spend only what it collects.

Beginning in August, public employees and pensioners have seen a 10-percent cut taken out of their cheques, and these “adjustments” are likely to continue until year’s end if there is no improvement in tax collection.

As a result, none of the announcements about the government’s next steps have proved able to reverse the lack of confidence in the markets, which this Thursday – for the second day – suffered a decline in stocks and public titles, causing a sharp rise in what is known as the country risk index.

This indicator, established by the JP Morgan investment bank to measure the difference in interest rates on Argentine bonds with respect to US bonds, jumped above 1,800 basic points.

The financial markets apparently have assumed that the decline in tax revenues will make it difficult to comply with the zero deficit plan. Furthermore, experts say that the tour by vice- minister of Economy, Daniel Marx, through Europe and the United States in search of support for a voluntary debt swap, was a failure and only served to worsen the situation.

Investor confidence has tumbled while the current financial context has only been aggravated by a threat from provincial governors to file a legal claim about cuts in funding from the federal government, and by reports indicating that automobile production and sales were halved in September.

Given this set of realities, former economy official Curia says it would be a mistake to believe that the decline in investor confidence is the result only of fears of devaluation.

Their scepticism can be explained by the country’s high debt and its lack of competitiveness, which are largely the result of artificially propping up the peso by tying it to the dollar, said the expert.